The Fed Raises its rates

The United States Federal Reserve announced that it was raising its federal funds rate to 4.25 %,   the 13th consecutive increase in rates over the past 18 months. Unemployment nationally in the States now stands at 5.0 %.
It is considerably higher in states like Michigan 6.1 %, Louisiana 11.3, Mississippi 9.6, South Carolina 6.9, District of Columbia 6.1 and Oregon 6.0. But New York with 4.9 %, Massachusetts 4.8, Minnesota 3.7, Florida 3.4, Virginia 3.4, Hawaii 2.7 %, Maryland 4.1, Nebraska, 3.7 and New Jersey 3.9 % Oklahoma 4.3, North Dakota 3.5 %Vermont, 4.0 % and Nevada 4.1% show how a recovery has taken place since 2001. ( All data for the states are from October 2005. The national rate is for Nov.2005)

Nevertheless, despite the recovery and drop in unemployment inflation remains low. The spike in oil prices appears to be over. The overall national core inflation rate is still well below 4 %.In fact, since the overall CPI increase was 4.7 % in October 2005 but that included the energy sector where the increase was of the order of 29.8 % over the past year and the food and beverage sector where the increase was 2.1 % over the past year, the core inflation rate excluding energy and food was 2.0 %.(Source:US Bureau of Statistics, Percent Changes in CPI for Urban Wage Workers and Clerical Workers broken down by category, October 2005 )

Hence with layoffs occuring in core manufacturing areas, it would seem that caution about raising rates beyond what they are now is in order. In   fact that is precisely what the Fed appears to be saying in its most recent announcement.The Federal Reserve open market committee is hinting strongly that the spell of increasing interest rates is coming to a close.

This is, of course, very welcome news . Its bound to restore optimism among millions of consumers, businessmen and workers that the Fed will not drive the economy into recession with obsessive interest rate rises.

In Britain, core inflation has fallen below 2 % while the CPI has has risen by only 2.1 % in the year to November, the lowest inflation rate since |June.The Bank of England's Monetary Policy Committee has kept rates at 4.5 % because of a fear about rising petrol prices and the standard monetarist fear about a responsive wage price spiral. But like everywhere else the inflation spiral has not materialized and perhaps we should expect central bank rates in Britain to fall over the coming year.

Unfortunately it may be some time before we see a similar trend in Canada where the central bank Governor and his staff still seem wedded to orthodox monetarism and the dubious theory of inflationary expectations.